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As global movement increases and more Indians work overseas, the taxation rules for Non-Resident Indians (NRIs) have become increasingly complex. If you're an NRI or planning to become one, it’s essential to understand how taxation works in both India and your country of residence. This guide provides an in-depth look at the tax implications for NRIs, the process of filing income tax returns in India, and how Double Taxation Avoidance Agreements (DTAA) can offer relief.

1. Who Is Considered an NRI?

A Non-Resident Indian (NRI) is someone who has moved abroad for employment, business, or education. The definition of an NRI, for taxation purposes, depends on their residential status in India, determined by the number of days they spend in the country during a financial year (April to March).

• For tax purposes, an individual is considered an NRI if:
• They have been physically present in India for less than 182 days during the tax year.
• They have been present in India for 60 days or more in a tax year but have spent less than 365 days in the preceding four tax years. (This rule doesn’t apply to citizens leaving for employment abroad or Indian crew members working on ships, where the presence condition is extended to 182 days.)

2. How Are NRIs Taxed on Their Income?

Income Earned in India: NRIs are subject to taxation only on the income that is earned or received in India. This includes:

• Salaries and Wages: If an NRI works for an Indian company, the salary earned from that employment is taxable in India.
• Rental Income: Income earned from property owned in India is taxable.
• Capital Gains: Any profit from selling property, stocks, or other assets located in India is subject to capital gains tax.

Example: Consider Anjali, who has been working in Dubai for two years and continues to receive a salary from her Indian employer. Since her salary is received in India and for services rendered there, it will be taxed in India. However, her income from investments in Dubai or other countries will not be taxed in India.

Income Earned Outside India: Income earned outside India, including salary, business profits, and capital gains from foreign assets, is not taxed in India unless the individual qualifies as a resident in India.

3. Filing Income Tax Returns for NRIs

The process of filing taxes can be daunting for NRIs, but it is mandatory if you have taxable income in India. There are two main tax forms NRIs use for filing returns:

• ITR-2: This is used if an NRI earns income other than business or professional income in India, such as income from property, interest, or capital gains.
• ITR-3: If the NRI has income from a business or profession in India, this form is required.

Example: Ravi is an NRI living in Singapore and owns a rental property in India. He earns rental income from this property, which is subject to Indian taxation. Ravi will file his tax return using ITR-2 and disclose his rental income from the property.

4. Benefits of Filing Tax Returns in India

Filing tax returns in India is crucial for NRIs, even if their income is limited to Indian sources. Some key benefits include:

• Tax Refund: If tax has been deducted at source (TDS) on your income, filing a return can help you claim a refund.
• Tax Relief under DTAA: NRIs who have paid taxes abroad on the same income can claim relief under Double Taxation Avoidance Agreements.
• Creditworthiness: Filing returns helps build a financial history, which is necessary for securing loans, credit cards, or even insurance policies.
• Easier Visa Processing: Many countries require proof of tax returns as part of the visa or residency process.

5. Documents Required for Filing Tax Returns

When filing tax returns in India, ensure you have the following documents:

• PAN Card (Permanent Account Number)
• Passport (for citizenship verification)
• Form 16 (issued by Indian employer if you’re employed in India)
• Bank Account Details (for TDS refund or payments)
• Property and Rental Income Documents (if applicable)
• Foreign Income Details (for income from abroad)

6. Double Taxation Avoidance Agreement (DTAA)

The Double Taxation Avoidance Agreement (DTAA) between India and many countries helps prevent the same income from being taxed twice. For NRIs, the DTAA provides a tax credit or exemption for the taxes paid in their country of residence, reducing their tax burden in India.

Example: Sandeep works in the UK and is an NRI. He pays taxes on his salary there. Under the DTAA between India and the UK, he is eligible to claim a tax credit in India for taxes paid in the UK. This ensures he isn’t taxed twice on the same income.

7. Advance Tax and NRIs

NRIs are also required to pay advance tax if their total tax liability for the year exceeds INR 10,000. Advance tax must be paid in instalments during the year, with the due dates being:

• 15th June: Up to 15% of the total tax liability
• 15th September: Up to 45% of the total tax liability
• 15th December: Up to 75% of the total tax liability
• 15th March: 100% of the total tax liability

Failure to pay advance tax on time will attract interest under sections 234B and 234C of the Income Tax Act.

8. Gifts, Inheritance, and Foreign Assets

• Gifts: Gifts received by an NRI are tax-free in India if the total amount doesn’t exceed INR 50,000. However, if the gift amount exceeds this threshold, it is taxable.
• Inheritance: There is no inheritance tax in India. However, capital gains tax will be applicable when selling inherited assets in India.
• Foreign Assets: NRIs are required to report foreign assets and income from foreign assets in their Indian tax returns. Income from foreign assets may be subject to taxation in India, depending on the DTAA provisions between India and the country where the asset is located.

9. NRI Status Upon Returning to India

Returning NRIs are initially treated as RNOR (Resident but Not Ordinarily Resident) for tax purposes. If you have been an NRI for 9 out of the last 10 years, and have lived in India for 729 days or fewer in the previous 7 years, you can enjoy RNOR status.

For two years after returning to India, RNORs can retain exemptions available to NRIs, such as the non-taxable status for foreign deposits and income. After this transition period, they will be treated as regular residents.

10. Why Should NRIs File Income Tax Returns in India?

1. To Claim Refunds: If taxes are deducted at source (TDS) but you are not liable to pay, filing a return allows you to claim a refund.
2. To Avail Loans and Credit: A consistent record of tax filings in India helps in securing loans and financial products.
3. To Ensure Compliance: Filing tax returns is a legal requirement and ensures compliance with Indian tax laws, preventing penalties.
4. Short-term/Long-term Capital Gains: If you have earned any capital gains in India, filing returns ensures you stay compliant and avoid any tax-related issues.

Final Thoughts

For NRIs, understanding and complying with Indian tax laws is crucial. With the right knowledge, proper filing of tax returns, and by leveraging benefits under DTAA, NRIs can manage their tax liabilities effectively. Always stay updated with the latest tax rules, and consult with a tax professional if necessary to avoid any potential issues.

If you have any further questions or need assistance, feel free to reach out to us at admin@ushmaassociates.com or info@nricaservices.com, or contact us via call/WhatsApp at +91 9910075924.

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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.